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Ray Grabanski: Commodities still best investment value?

Agriculture.com Staff 02/07/2016 @ 4:39am

Funds continue to plow money into commodities, with crude oil and corn prices running to new highs this week in another push by commodity funds to own even more commodities. Its surprising funds are still interested in buying commodities at these price levels, but if you look at their alternative investments, perhaps it isn't so surprising. Stocks have stagnated at best, and investments in them with a weakening dollar actually add up to a negative overall return in purchasing power. The Federal Reserve continues to plow money into banks, selling hundreds of billions of dollars into the borrowing world. Inflation is alive and well, and commodities to date have been the best investment to protect against inflation.

Commodities have been much better than most real estate, too, as housing values have crumbled under the speculative bubble bursting in the housing markets. The only alternative real estate venture is farmland, which has seen remarkable returns the past few years. But farmland is hard to locate, buy, and sell. Commodities is a much simpler game to play for now, so the funds continue to plow money into them.

With crude oil penetrating the $110/barrel level today, its becoming increasingly obvious that the world's energy demand is not abating. In fact, its probably still climbing at the same time that supplies are dwindling of cheap oil reserves. Renewable sources of energy are still not finding widespread use (although they are expanding), so that net the purchase of commodities is still a pretty good investment game.

Wet weather this week continues in the corn belt, with central and eastern areas about as wet as they've ever been in history to date. While some areas are in good shape, the majority of the central and eastern corn belt is much too wet. That is increasing the price gains of corn, and putting pressure on to bid for more corn acres (and to keep current intended corn acres). Soybean prices have even come to life, although we might just be completing the right side of a head and shoulders top. But you have to admire the soybeans recent rally, as it has brought the soybean/corn price ratio back to 2.0 (in line with a historically strong corn price bidding). Profitability still favors corn (which developed in about mid-March), but weather needs to cooperate in order for producers to plant more corn.

Wheat is the only commodity struggling in price, as winter wheat seems to have improved from freeze-up (Pro Ag yield models jumped about 1 bu/acre from November to April), although the crop is still slightly below normal. Rain this week in western HRW wheat areas might turn that table a bit, as dry western areas need more rain to improve the crop.

So today, wheat is the weak sister of the grain complex, with corn top dog and soybeans caught in between. Stocks projections by USDA tightened in corn today, but still 2007/08 ending stocks are comfortable. Its 2008/09 that is more temperate as we need more corn acres and a decent crop to avoid <500 mb carryout projections at the end of the year. Its getting to the point that funds almost are in control of the corn market, with prices ballooning over $6 in the past week or so of trading.

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